Air France's Surprising Air Show

May 19, 2003

How long can Air France defy gravity? Despite a global economic downturn, September 11, the war in Iraq, and now SARS, the French flag carrier has consistently turned in a solid financial performance while steadily gaining market share in Europe.

On May 13, Air France posted earnings of $139 million on revenues of $14.7 billion -- up 1.3% -- during the 12 months ended Mar. 31. True, it had an operating loss of $142 million during the first three months of 2003, but that's nothing compared to the red ink incurred by fellow European flag carriers. Lufthansa (DLAKY) lost $476 million during the first quarter, and U.S. carriers such as United Airlines and American Airlines (AMR) have sustained severe losses.

Air France has inherent strategic advantages over its competitors. Its hub at Paris' Roissy Charles de Gaulle Airport is well-positioned for connections between long-haul and intra-European flights, and unlike other major European airports, it has plenty of room to expand. Air France's global-passenger traffic is more widely distributed than most rivals'. British Airways, for one, was much harder hit by the September 11 attacks because of its heavy dependence on transatlantic traffic.

Industry watchers also credit Air France's strong performance to the leadership of Chief Executive Jean-Cyril Spinetta, who took over in 1997. Spinetta shepherded the then-state-owned airline through an initial stage of privatization in 1999 that reduced the government's stake to 54.4%. He has trimmed costs and improved operating margins while maintaining relative peace with the carrier's labor unions for the past few years -- no small achievement in strike-happy France. He also made the difficult decision to suspend operations later this year of the high-profile but money-losing Concorde supersonic jet.

Spinetta still needs to keep a firm hand on the controls, though. While Air France has long dominated air travel within its native country, it's increasingly under attack by low-cost carriers. London-based easyJet already serves Paris and Nice, and just secured 7,300 landing slots at Paris's Orly Airport, where it plans to introduce flights to Marseilles, Milan, and Barcelona. Spinetta recently chatted with BusinessWeek Paris Correspondent Carol Matlack about Air France's performance and outlook. Edited excerpts of their conversation follow:

Q: Air France's annual results looked surprisingly strong. How do you account for that?

A: Our operating result was slightly better than the previous year [$187 million, vs. $182 million]. We achieved this in a very difficult context, not only because of the international and economic situation but also incurring some extraordinary charges. For example, suspending operations of the Concorde will cost 59 million euros in exceptional charges. Scheduled service by the supersonic Concorde is to be discontinued this year. Air France is demonstrating a very good ability to resist difficult market conditions, compared with our competitors. We are controlling our costs. Our yield is stable. And we're gaining market share. We're now No. 1 in Europe, with 17.6% of the market.

Q: How are conditions shaping up for the next few months?

A: We've seen over the past several weeks an improvement in the rate of passenger reservations. With the end of the war in Iraq, there is more confidence on the part of businesses and individuals. The reservations are coming back, and this is starting to compensate for the sharp falloff earlier this year.

Q: How are you responding to SARS [severe acute respiratory syndrome]?

A: We have reduced flights to the countries affected by about 15%. We continue to lose revenue on Asian routes, especially China, but on other major routes, such as North America, we don't see any problem

Q: When do you expect the next stage of privatization to take place?

A: The legislation that would permit this has already been enacted. The Air France board has approved the necessary changes, and they'll be presented to our shareholders at our annual meeting on July 10. We'll be ready to proceed. After that, it will depend only on the situation of the markets.

Q: How are relations with the employee unions?

A: We have had, for the past five years, quite a calm situation with our ground-crew and flight-attendants' unions. We've had some strikes by pilots -- but we've had more strikes than strikers, so there haven't been any serious consequences. I think there's more understanding on the part of our personnel. They accept that our industry is in difficulty.

Q: How is Air France responding to competition from low-cost carriers such as easyJet?

A: We started offering some new, lower fares last October, and this greatly improved the load factor. We significantly improved our economic performance in doing this, so the competition from such carriers isn't something that we're worried about.

Q: What's the next step for the SkyTeam alliance, which already includes Air France, Delta (DAL), and Alitalia?

A: KLM (KLM) is now considering whether to join SkyTeam. We've been in discussion with them for quite a few months. The recent code-sharing accord in the U.S. between Northwest and Continental Airlines puts more pressure on KLM to partner with SkyTeam. That would be good news for SkyTeam. But it's up to KLM to decide.